Politics, Systemic Risk and Illiquid Cross-Listings: The Case of the US GDR Model, and the Russian Sanctions-Response Model as Applied in Nigeria

Abstract

Global Depository Receipts (GDRs) have become a popular method for emerging markets companies (from India, Brazil, etc.) to access capital markets in more developed countries. However, there have been problems such as illiquidity of GDRs; embedded currency risk; inadequate or inaccurate accounting disclosures by GDR-issuers; and lack of price discovery. Furthermore, corporate governance deficiencies of GDRs-issuers and systemic risk in the issuers’ home-countries complicate matters. This article uses 2011-2014 data from three Nigerian banks who have been assigned junk bond credit ratings by Moodys, SP and whose GDRs are listed on the London Stock Exchange and have been illiquid (Zenith Bank, GT Bank and Diamond Bank); and also economic data on the Russian government’s responses to economic sanctions imposed in 2014. The article contributes to the literature by explaining the following, many of which have not been addressed at all or in detail in the literature: i) accounting disclosure, “Bank Opacity” and behavioral problems may contribute to illiquidity of GDRs, increases in earnings management and systemic risk; and low credit ratings of banks; ii) there may be a symbiotic relationship between institutionalized earnings management and corporate governance deficiencies on one hand, and the trading patterns of GDRs and the perceived credit quality of issuers; iii) the number of issuers’ outstanding shares can have significant impact on illiquidity of GRDs, investor behavior, a broad range of corporate governance metrics, managerial behavior, incentive-effects and systemic risk; iv) the AMCON business model causes Inefficient Cross-Subsidization (among banks and industries), Valuation-losses, Distortion of Borrowers’ Willingness-To-Resolve and Moral Hazard, and continues to be a major cause of illiquidity of the GDRs and the low credit ratings assigned to Nigerian banks; v) the trading patterns of the Case banks’ GDRs and the Case-Banks’ junk bond credit ratings are a form of systemic risk because they carry or can carry significant information content, and can cause contagion. The article also proposes testable hypothesis and feasible solutions to the illiquidity of GDRs, problems caused by AMCON and the Corporate Governance deficiencies discussed herein.